COMMON STOCHASTIC TRENDS AND AGGREGATION IN HETEROGENEOUS PANELS

In nonstationary heterogeneous panels where the number of units is finite and where each unit cointegrates, a large number of conditions needs to be satisfied for cointegration to be preserved in the aggregate relationship+ In reality, the conditions most likely will not hold+ This paper takes a closer look at what happens when the conditions are violated+ In this case, the question of whether an aggregate relationship is observationally equivalent to a cointegrating equation is of particular interest+ We derive a measure of the degree of noncointegration of the aggregate estimates, and we explore its asymptotic properties+